WITH VIRGIN MOBILE USA L.L.C. SEEKING A $500 MILLION INITIAL PUBLIC OFFERING, the company is looking to complete the first IPO of a mobile virtual network operator in the United States. The IPO market has been stronger this year than in recent years, which may benefit the company-but investors also may look askance at a company that does not control its own network, particularly in light of the troubles other MVNOs have had in the past two years.
Virgin Mobile USA detailed its operations in its IPO filing, reflecting a wireless business that had managed to gain almost 5 million customers in five years, but has a low average revenue per user of around $22 and has yet to turn a yearly profit-although it is close, with a net loss at the end of last year of $37 million, on revenues of $1.1 billion. Virgin Mobile USA did report a quarterly profit for the first quarter of 2007: net income of $15.4 million, on revenues of about $340 million.
“They’re just now getting to the point of profitability, so that’s not the ideal time for an IPO,” said John Byrne, analyst with Technology Business Research Inc. “On the other hand, they have everything going in the right direction in terms of profitability, so if you follow that trajectory, that would say going forward, they’re probably going to be marginally profitable. It’s better than not being profitable.”
Byrne pointed out that Clearwire Corp. went public earlier this year with a business model “even more tenuous” than Virgin Mobile USA’s, but still managed to raise $600 million.
Despite the long road to profitability, Virgin Mobile USA has been seen as the MVNO that others would like to copy. The company, founded as a joint venture between Sprint Corp. and the Virgin Group in 2002, gained a customer base of 1 million within 18 months. As of March 31, 2007, Virgin Mobile USA said it served nearly 4.9 million customers and controlled about 15% of the prepaid market.
Tower Group analyst Charul Vyas said that the company’s positives include its strong brand recognition, good distribution and the data component of its services; negatives include its low ARPU and relatively high churn, which was at 4.8% at the end of last year and 4% at the end of the first quarter of 2007. Virgin Mobile USA’s mobile advertising program, Sugar Mama, may offer an alternative revenue stream than services alone, she said.
Also, “It seems like everyone wants the youth market, so going after that target may make it more challenging for Virgin or MVNOs for that demographic,” she added.
Meanwhile, Amp’d Mobile Inc. declared bankruptcy 18 months after its launch and reached fewer than 200,000 customers. The end of 2007 will mark 19 months since launch for Helio L.L.C., which is expected to have between 200,000 and 250,000 customers-and to have burned through $330 million to $360 million this year. Mobile ESPN, meanwhile, made it fewer than eight months before its parent company pulled the plug in favor of a non-MVNO model.
But, those companies differed from Virgin Mobile USA in several significant ways: they pursued postpaid models, and two of them have had to build brand recognition from scratch. Also, Virgin Mobile USA put together a strong distribution network of more than 35,000 retail locations that sell its handsets. Its replenishment cards are available at 130,000 third-party retail stores.
The IPO
Virgin Mobile USA initially filed for a $100 million IPO, but recently revised its filing to $500 million. Byrne interpreted that to mean the MVNO’s initial strategy of a small IPO and taking on new debt to pay off its old debt and buy out some of Sprint Nextel Corp.’s stake in the company was met with unfavorable terms in the debt market-so the company had to increase its IPO.
And, he added, another question is whether there is a current market for such a large IPO.
Virgin Mobile USA acknowledged in its most recent SEC filing that the company has used a large amount of debt to finance its operations and had accumulated debt of $531 million, by March 31. The company also noted that it ran into trouble in 2005 by going into default on one of its loans and having to restate the terms. The default meant that Sprint Nextel didn’t receive timely payment for network services-which is similar to the trouble that put Amp’d on the road to bankruptcy.
The company has exclusive rights to the Virgin Mobile brand, and an agreement for network services with Sprint Nextel through 2027. However, the fact that Virgin Mobile doesn’t control its own network may also be of concern to investors, Byrne said-although the company tried to spin that as a positive in its filings, because it doesn’t have to invest in network infrastructure.
“Sprint doesn’t have the best reputation in terms of the quality of its network, so that’s a challenge,” Byrne said. “They also don’t have the greatest reputation as a partner, if you look at their affiliates. But this relationship is now five years old, so you have to assume that they’ve worked out those kind of kinks in terms of the partnership.”
Several analysts also noted that the company’s formula by which it calculates customers and churn rate involves accounts active in the last 150 days-far greater than the industry norm of 90 days.
Analysts disagreed on whether the recent bankruptcy of Amp’d Mobile was likely to impact Virgin Mobile USA’s IPO, since the companies’ business models are different. Alex Besen of the Besen Group, acknowledged that the two companies “are not apples to apples-they are something like a green apple and a red apple.”
Nevertheless, he added, “I think at this point that the Amp’d Chapter 11 will have an impact on the Virgin IPO.”
Still, Besen said, it’s probably a matter of now-or-never for Virgin Mobile USA to go public.
“If they cannot do the IPO, it’ll be too late. They’re going to miss their chance, the market is going to get crowded, they’re going to lose more subscribers and their finances are going to get worse. The sooner, the better for them.”
